While reactions to the US withdrawal from the Paris accord may be dominating headlines, a no less remarkable development in climate change response is occurring at the annual shareholder meetings of US corporations. In a milestone for shareholder advocacy, a majority of shareholders voted in favor of proposals at four energy companies asking for greater disclosure on climate change in recent months. The votes marked the first time that shareholders approved resolutions at US companies on the issue of climate risk in opposition to board recommendations.

For the last several years, shareholders have asked companies to disclose more information about the risks and opportunities to their businesses’ resulting from public policies designed to limit climate change. Both shareholders and companies have increasingly supported the need for this disclosure. In 2015, climate risk proposals received above 90% support at BP and Royal Dutch Shell after the boards of these companies recommended votes in favor.  In 2016, 38% of Exxon Mobil shareholders supported greater disclosure about the company’s strategy to address climate risk, despite the board’s opposition.

In 2017, proposals on this topic received majority support for the first time at three companies: Occidental Petroleum, PPL Corp (an electric utility) and Exxon Mobil. A proposal at Chevron was withdrawn from the company’s ballot shortly after the Occidental vote when management and shareholders were able to come to terms.  A slightly different climate change proposal at Pioneer Resources, an oil and gas company, also received majority support.

Sending a Message to Exxon Mobil

The vote at the world’s largest public energy company, Exxon Mobil, was particularly notable.  The proposal received 62% approval, one of the highest-ever levels of support for an environmental proposal opposed by management.  The vote at Exxon Mobil may be surprising because, unlike the other companies whose shareholders voted in support of greater disclosure, Exxon Mobil has produced multiple reports on climate change for several years, appointed a climate scientist, Susan Avery, to its board, and actively supported remaining in the Paris Accord.

Nevertheless, the vote demonstrated that these efforts were not seen as sufficient.  While it is not possible to know shareholders’ rationales for their votes, concerns about Exxon Mobil’s approach to climate change likely drove voting decisions.  Most prominently, several states are suing the company over reports that management knew about the dangers of climate change as early as the 1970s, but made public statements casting doubt on the science and opposing climate mitigation policies well into the 2000s.  While these allegations remain unproven and Exxon Mobil disputes them, the shareholder vote suggests a widespread questioning of the credibility of the company’s communications on this issue.

Second, mainstream analysts are beginning to challenge energy company forecasts about the future of global oil demand.  According to the standard narrative, oil demand will continue to grow for decades, as efforts to reduce emissions in the developed world are offset by rising living standards in the developing world that will boost energy use. However, rapid technological advances in renewable energy, energy efficiency and battery technology, combined with more aggressive environmental policies in the largest and fastest-developing economies, could “decouple” fossil fuel use from increased economic activity.  For example, China is now the world’s largest market for electric cars, and India has pledged to sell only electric vehicles starting in 2030.   Some independent analysts are forecasting much slower growth in demand for fossil fuels and an earlier date for “peak demand,” after which global fossil fuel use begins to decline.

While considerable uncertainties exist about the future of oil demand, Exxon Mobil reports only on one, more bullish, forecast of the future.  If its forecasts prove too optimistic, the company may not be prepared to respond. Perhaps Exxon Mobil has considered more diverse scenarios internally, but shareholders have no way of knowing what those scenarios are or how they may be affecting business strategy. By supporting the proposal asking for different demand scenarios, shareholders are asking the company to demonstrate flexibility in its strategic planning.

Finally, some Exxon Mobil shareholders have long expressed concern about the insularity of its board, which has a history of resisting calls to meet with its shareholders or with any stakeholders who hold views on climate change that differ from management’s.  These shareholders wonder how the board can gain a well-informed perspective on the issue without more diverse sources of feedback.

Broader Lessons

Concerns about credibility, insularity and strategic rigidity aren’t just about the environment, but about corporate governance more generally. They raise important questions about directors’ ability to serve as an independent and objective check on management.  Ensuring the effectiveness of boards in holding management accountable has been long accepted as a key shareholder role in corporate governance. Majority votes at four companies signal greater appreciation of the link between corporate climate change strategy and investor responsibility for board oversight.

Shareholder concern about climate change policy is growing at a critical time.  The US administration and Congressional leadership are retreating from active efforts to mitigate climate change, most recently through President Trump’s recently announced intent to withdraw from the Paris climate agreement. Climate efforts in the US have always involved loose coordination among diverse actors including cities, states, civic organizations, investors, and companies. The absence of coordination from the central government will not negate these efforts, but will result in a further decentralizing of leadership and the exacerbation of market uncertainties.

As stakeholders with a long-term, global interest in economic outcomes, shareholders can influence private sector efforts to mitigate climate change.  However, at a moment when shareholders are increasingly willing to use their power to support resolutions aimed at encouraging this kind of long-term thinking, current legislation under consideration in Congress would curtail the right to file proposals for most shareholders (see our May 11 piece “Why the Choice Act Is a Threat to Corporate Stewardship”).  This year’s annual meetings show the value of this tool for exercising shareholder voice to align their interests with corporate governance.

John K.S. Wilson is the Head of Corporate Governance, Engagement & Research at Cornerstone Capital Group.  He leads a multidisciplinary team that publishes investment research integrating Environmental, Social and Governance (ESG) issues into thematic equity research and manager due diligence. He also writes and presents widely about the relevance of corporate governance and sustainability to investment performance for academic, foundations, corporate and investor audiences.